Real and imaginary problems of electronic cash transfers

A host of objections and criticisms have come from rival political parties and statist ideologues. Some problems of CTS are real, but many others are imaginary.

The Congress Party is about to launch what it hopes is an election winner — an electronic cash transfer scheme (CTS) to send government payments and subsidies directly into the accounts of beneficiaries, instead of through existing channels bedeviled by corruption and waste. Starting January 1, the government will transfer 29 sorts of benefits (like pensions, scholarships, fuel subsidies) through the CTS, taking advantage of the Aadhar scheme for electronic identification of all individuals. In due course the scheme will be expanded to cover 42 benefits, and will cover the whole country by 2014, in time for the next election.

Right now, says finance minister P Chidambaram, it costs the government Rs 3 to transfer one rupee to the pockets of beneficiaries. The rest goes on administrative expenses, waste and corruption. Cash transfers can eliminate intermediaries of all sorts, greatly reducing corruption and administrative burdens.

Right now, beneficiaries have to produce different paperwork for every benefit. CTS has the potential to consolidate all paperwork, drastically reducing red tape and improving efficiency. Total transfers are estimated at Rs 320,000 crore, so if just one-third going to waste and corruption is avoided, it will mean Rs 100,000 crore more cash to beneficiaries. This would hugely benefit hundreds of millions of people.

A host of objections and criticisms have come from rival political parties and statist ideologues. Some problems of CTS are real, but many others are imaginary.

The most imaginary and hilarious objection (from Arvind Kejriwal, the BJP and CPI) is that a cash transfer is a bribe to voters. Political parties have for decades offered welfare goodies such as free electricity and water, subsidized food, free TVs, free bicycles and so on. These are unashamed ways to woo voters. But a bribe is illegal gratification. Welfare giveaways can be called unwarranted or misdirected, but not illegal.

Others say cash benefits for education or fuel may be diverted by a beneficiary to liquor instead. True, but this is equally true of benefits in kind. Mid-day school meals mean less family spending on food, so the money saved can be spent on liquor. Subsidised kerosene or rice can be sold in the open market and the proceeds used for liquor.

In this, look at the example of the Nitish-BJP coalition government in Bihar. Nitish Kumar decided to use cash transfers instead of physical delivery of free bicycles for school kids, to eliminate the myriad leakages in physical delivery of other government services. Was some of the cash spent on liquor instead of bicycles? Maybe, but overall the scheme was a thumping success. Thus opposition parties have themselves proved the efficacy of cash transfers.

Some critics claim that cash transfers will be a way of reducing total benefits. That's pure mendacity. In fact, much more money will actually reach beneficiaries, which is why rival politicians are so worried.

Still others say cash transfers might mean the dismantling of all public systems like ration shops and government schools. Sorry, but the Congress is ideologically incapable of such libertarianism. Montek Ahluwalia has clarified that ration shops will continue, and government educational and health facilities are being expanded rapidly.

However, there are indeed many real problems. There is no good system of identifying those truly in need, so benefits can go to better-off folk, especially those mis-identified by sarpanches. It may prove politically impossible to withdraw benefits from once-poor folk who become better off. Many poor illiterates may not be registered under Aadhar or may not be linked to bank accounts, and can get left out.

However, such problems of inclusion and exclusion are so terrible in existing systems that even a flawed CTS should be far better. A big administrative effort will be needed to ensure that Aadhar and bank accounts eventually cover everybody.

Many glitches will arise in rolling out such a scheme. Some pilot projects have already tested different transfers in different areas, and corrected the glitches. But more experimentation is needed. The danger is that the scheme will quickly be extended to the whole country in half-baked shape simply to help the election prospects of the Congress. This can mean a flawed CTS that later needs overhaul.

The biggest danger is that CTS will not substitute existing subsidies but add to them. Vested interests will resist winding up any existing delivery mechanism. So instead of substituting subsidized kerosene or LPG with cash, politicians might provide both cash and subsidized fuel. Ditto for subsidized food, electricity, and dozens of other items. Such populist excesses would serious strain already stretched government finances. Provided this is avoided, cash transfers should be a big success.